Tagged: GDP growth

If one observes the comments of Indian Prime Minister Dr Manmohan Singh’s, a doubt arises whether the Indian government is going to show rising inflation as an excuse for inviting foreign private investments in Indian retail sector.

The Vice-President of planning commission Mr Montek Singh Ahluvalia has been telling that supply side bottlenecks have been the major cause for the rising inflation in India. Today, speaking at a conference in New Delhi Prime Minister Manmohan Singh expressed concerns over rising inflation adding that inflation is becoming a major obstacle for the growth prospects of India.

An important aspect of Mr Singh was that what he opined for rise in inflation. He said that the farm supply chains needed to be boosted with organised retail chains. This raises doubt that Indian government is going to give permission for foreign entry into retail sector in the name of organized retail chains.

Oil prices are at its peak for the first time after the worst financial crisis since the great depression in1930s that erupted in September 2008 worldwide. Peak levels have been reached on both sides of the Atlantic Ocean i.e. in North America and Europe.

In Europe, Brent crude futures hit $91.58 per barrel while West Texas Intermediate in the US touched $89.35 per barrel, both being highest levels since the financial crisis of September 2008. However, these levels are well below the pre-crisis peak levels. Prior to the financial crisis, due to speculative bubble in House building sector, all commodities prices along with crude price were flying high in the sky. Brent Crude price was pushed up to $147.50 per barrel.

Factors of Crude Rally

There are several reasons that drove crude price to its peak level. Primary factors have been:

The relatively rising demand due to global recovery though not equalled with pre-crisis demand: This is a long-term factor assuming that a double dip does not occur. The US spent $1.7 trillion as part of “Quantitative Easing 1” that extended unemployment benefits, reduced tax rates for both corporates and consumers and increased liquidity in the market and absorbed toxic mortgage housing loans that became biggest impediment for post-crisis growth of the economy. In addition to this, the US government announced QE2 programme i.e. second stimulus programme in November to buy treasury bonds thereby releasing more printed dollars into the economy. Reports are coming that the Fed is thinking of increasing QE2 money, originally set at $600 billion. If that happens, prices of all commodities including crude oil will increase further.

Cold weather in Europe: This is a short-term factor, which will last up to the end of winter season. All European countries are shivering with cold weather spread across Europe continent. Cold weather increases the consumption of fuel, which in turn increases fuel prices as demand increases.

Growth prospects across the rich world have not budged since the Federal Reserve announced a second round of bond purchases worth $600 billion, according to the latest Reuters poll of more than 200 economists. The latest consensus forecasts lend support to critics of the Fed’s hotly-debated policy of further expanding its balance sheet to boost the economy who say it will do more to lift already-soaring asset prices instead.

Polling for the U.S., euro zone and Britain was conducted after the Fed announced last week it planned to resume its quantitative easing (QE) programme. The central bank itself appears split on the merits of more QE, with several Fed policymakers vocally discussing it, on top of numerous emerging market policymakers sniping at the Fed ahead of the G20 summit in Seoul this week.

Still, economists say that more Fed bond purchases provide insurance against the risk that the world’s largest economy suffers another sharp slowdown, and should underpin growth in the rest of the rich world, even with a weaker dollar. "Over the next couple of quarters we still think the growth pace is likely to fall short of the longer-term trend," said Jan Hatzius, chief U.S. economist at Goldman Sachs in New York.

Some economists are becoming a bit more optimistic, coinciding with a return to meaningful private sector payroll growth in the latest month. "But as we move through 2011, the lagged effects of the renewed monetary easing combined with a gradual slowdown in the pace of private deleveraging should result in a substantial pickup in GDP growth," Hatzius said.

The Reuters consensus was for 2.0 percent annualised U.S. GDP growth in the current quarter, picking up to 2.5 percent in the second quarter and 3.0 percent by the end of next year, all unchanged from the October survey. These modest rates of growth stand in contrast with emerging Asian economies like India and China, which analysts said in a poll taken last month would expand more than 8 percent and close to 9 percent in the coming year.

The Reserve Bank of India (RBI) will take ‘appropriate measures’ to tackle inflation, the finance minister said on Saturday, though he added that India could not go on a "reverse growth path". Pranab Mukherjee was speaking a day after data showed industrial output accelerated much faster than expected in July, strengthening the case for further monetary tightening by the central bank to tame near double-digit inflation. Recent signs of cooling growth in Asia’s third-largest economy, along with a sluggish global economic recovery, had tempered expectations for a rate increase at the central bank’s policy review on Sept. 16.

But economists said the surprisingly strong industrial performance boosted the chances of a rate rise next week. "Inflation is a concern. I am concerned that prices are increasing," Mukherjee said in Kolkata. "RBI will take appropriate measures as and when needed. But at the same time, I cannot go on a reverse growth path." Pranab Mukherjee said India would likely grow between 8.5-8.75 percent in the fiscal year ending next March, therefore possibly exceeding earlier growth estimates of 8.5 percent. Industrial output rose 13.8 percent in July from a year earlier, nearly double analysts’ forecasts for a 7.7 percent rise. It was the fastest growth since April.

It is widely believed that the Asian emerging economies are leading the world economy to recover from its worst crisis of 2007, since the ‘Great Depression’ of 1930s. After observing the GDP growth figure of 8.8% in the first quarter of FY 2010-11 (begins from April 2010 and ends in March 2011), it is understood that the expectations on India are not misplaced. The Planning Commission has released the data for Q1 last Tuesday. India’s GDP has grown by 8.8% from 8.6% of its previous quarter i.e. 4th quarter of previous financial year 2009-2010 despite partial withdrawal of stimulus measures. It is the highest growth rate since last quarter of 2006-07. The GDP growth of Asia’s 3rd largest economy after China and Japan is particularly notable because of the slow pace at which the GDPs of the developed economies like the US, Japan and the EU have grown in the same period.

As per the data released the robust GDP growth is driven by equally robust manufacturing sector growth that grew by 12.4 percent against 3.8 percent in the same period of last fiscal year. Agriculture and allied activities also fared well which expanded by 2.8% against 1.9% in Q1 of FY10. India’s Prime Minister Dr. Manmohan Singh has been advocating that agriculture sector has to grow by at least 4% for India’s GDP to grow by double digit figure. The Finance Minister Pranab Mukherjee expressed confidence that Indian GDP growth would register the targeted figure of 8.5%. The Deputy Chairman of the Planning Commission Montek Singh Ahluwalia is even more optimistic of GDP growth rate for the present fiscal surpassing the targeted figure of 8.5%.

The government is trying to strike a balance between farm interests and industry as it faces a series of violent protests against attempts to take over land, a debate that has consequences for investment and internal security.

WHY IS LAND A BIG ISSUE?

For many Indians, land is the only asset or social security that they possess and is a mark of social standing. Nearly 60 percent of India’s 1.2 billion citizens depend on farming for a living and each hectare of farmland supports five people. Most projects require huge amounts of land. South Korea’s POSCO’s proposed steel mill in Orissa will be built on 1,600 hectares. A six-lane highway between the Taj Mahal city of Agra with New Delhi will require 43,000 hectares. Compensation ranges from between $4,300 a hectare, in the case of top steelmaker ArcelorMittal’s proposed plant of over 4,400 hectares in Jharkhand, to $14,600 per hectare, offered to farmers displaced by POSCO’s Orissa mill. Despite the seemingly attractive prices, farmers have few other livelihood options and land taken over for industrialisation has been blamed for displacing hundreds of thousands of people. Protests against land being taken over have become more visible as the economy expands and the rich-poor gap widens.

WHAT DOES THE LAW SAY?

India’s century-old land acquisition law gives the state the right to take over land for public purposes with little compensation. Critics say the government interprets “public” to include private investments and this amounts to land-grabbing. They want private firms to buy the land from the owners at market rates. India is considering a new law which would guarantee market or higher rates.

WHAT IS AT STAKE?

Analysts cite problems in acquiring land as the biggest hindrance to rapid industrialisation of Asia’s third-largest economy, pointing out to several stalled highways, power utilities and factories. Prominent amongst these are multi-billion dollar investments by top steelmakers like ArcelorMittal, South Korea’s POSCO and Tata Steel. Protests over mining on tribal land in Orissa have stalled plans of British-based mining group Vedanta Resources Plc to extract bauxite. Continue reading →

China has overtaken Japan to become the world’s second-largest economy, the fruit of three decades of rapid growth that has lifted hundreds of millions of people out of poverty. Depending on how fast its exchange rate rises, China is on course to overtake the United States and vault into the No.1 spot sometime around 2025, according to projections by the World Bank, Goldman Sachs and others. China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, China’s chief currency regulator mentioned the milestone in passing in remarks published on Friday. "China, in fact, is now already the world’s second-largest economy," he said in an interview with China Reform magazine posted on the website (www.safe.gov.cn) of his agency, the State Administration of Foreign Exchange. Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japan’s or America’s. "China is still a developing country, and we should be wise enough to know ourselves," Yi said, when asked whether the time was ripe for the yuan to become an international currency.

CAN IT BE SUSTAINED?

China’s economy expanded 11.1 percent in the first half of 2010, from a year earlier, and is likely to log growth of more than 9 percent for the whole year, according to Yi. China has averaged more than 9.5 percent growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said. If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces. In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the United States as the world’s largest energy user. If China can keep up a clip of 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history. The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.